Accelerating U.S. Economy May Put Fed Asset Purchases on Hold

A worker welds a boiler during the manufacturing process at the Energy Kinetics plant in Lebanon, New Jersey, U.S. Since the Fed’s last meeting early in November, reports on employment, manufacturing and retail sales have dispelled concerns the world’s largest economy may slide back into recession. Photographer: Emile Wamsteker/Bloomberg

Dec. 8 (Bloomberg) -- The U.S. economy may have achieved a
sustainable pace of growth that eases pressure on the Federal
Reserve to buy more bonds while giving it time to fine tune how
it informs the public about the outlook for interest rates.

“Recent economic data takes away some of the urgency for
the need to engage in a new round of quantitative easing,” said
Michael Feroli, a former Fed economist who is now chief U.S.
economist at JPMorgan Chase & Co. in New York. The Federal Open
Market Committee “can say, ‘Let’s wait and see if this is going
to build on itself.’”

Since the Fed’s last meeting early in November, reports on
employment, manufacturing and retail sales have dispelled
concerns the world’s largest economy may slide back into
recession. Signs of economic strength, along with coordinated
central bank action to alleviate the European debt crisis, last
week helped drive the biggest rally in the Standard & Poor’s 500
Index since March 2009.

The FOMC will update its outlook on the economy in its Dec.
13 statement and maintain a pledge to leave the benchmark
lending rate at zero until at least mid-2013, Feroli said.
Policy makers at their two-day January meeting may announce a
strategy for improving how they communicate their policy goals
to the public, said Antulio Bomfim, senior managing director at
Macroeconomic Advisers LLC in Washington.

Fed officials plan next month to update their quarterly
forecasts for growth, inflation and employment. That gives them
an opportunity to explain their outlook for the federal funds
rate in coming months, said Bomfim, a former senior economist at
the Fed and former portfolio manager at Oppenheimer Funds.

Out of Step

Currently, the FOMC’s 2013 interest rate pledge is out of
step with both its own economic outlook and investor
expectations.

Federal funds futures contracts indicate investors believe
the Fed will increase the main rate after mid-2013. Central bank
officials expect unemployment of about 8 percent in the fourth
quarter of 2013. That’s two percentage points above the high end
of their longer-run estimate for full employment of 6 percent.

At the same time, policy makers forecast inflation to be
around their 1.7 percent to 2 percent goal by the end of 2013.

Chairman Ben S. Bernanke said at a Nov. 2 news conference
that the FOMC statement that day bears “no implication” the
Fed plans to raise interest rates in 2013. The committee hasn’t
specified any set date for a rate increase, he said.

“The statement says at least mid-2013,” Bernanke said.
“So clearly it could well be some point beyond that.”

Global Poll

The U.S. receives its highest rating from international
investors in more than two years on optimism the economy will
weather the financial crisis in Europe and avoid a recession in
2012, according to the quarterly Bloomberg Global Poll.

Forty-one percent of those surveyed identify the U.S. as
among the markets that will perform best over the next year.
That’s up from less than one in three who felt that way in
September, according to the survey of 1,097 investors, analysts
and traders who are Bloomberg subscribers conducted Dec. 5-6.

Bernanke asked an FOMC subcommittee in November to consider
giving the public more information about policy makers’
interest-rate outlook. That’s one piece of information that’s
missing from officials’ quarterly forecasts.

Publishing participants’ interest rate forecasts would help
clarify the mid-2013 conditional pledge because most FOMC
members probably expect to tighten after that date, Bomfim said.
Such a communications change would also tie their policy outlook
more closely to their forecasts for growth, inflation, and
unemployment.

More Stimulus

“I do think that would be a good move” that would provide
slightly more stimulus to the economy, Bomfim said.

Macroeconomic Advisers estimates that a six-month extension
of the current near-zero funds rate policy would lower the yield
on U.S. 10-year Treasury notes by about 0.2 percentage point, so
long as the market isn’t already anticipating such the move. The
yield on the 10-year U.S. Treasury note is 2.03 percent.

Extending the rate pledge would put the FOMC’s credibility
at risk, said John Silvia, chief economist at Wells Fargo
Securities LLC in Charlotte, North Carolina. Markets may
interpret a forecast of the federal funds rate as a statement of
policy certainty, when in fact the outlook could be subject to
substantial revisions, he said.

Charts Published

Fed officials for the first time published charts in the
minutes of their November meeting measuring the risk to their
outlook. Sixteen Fed officials said “uncertainty” about the
pace of gross domestic product growth was higher, compared with
13 in June, the minutes showed. Eleven said the risks that the
unemployment rate would be higher were weighted to the upside,
up from nine in June.

The FOMC will want to retain policy flexibility because of
the lack of clarity in the outlook, Silvia said.

“Don’t tell me there’s a definite path you’re going to
follow in the middle of a storm,” he said. “How clear can you
be on policy given the uncertainties in the economy and other
policies globally?”

Fed officials also differ over whether publishing a rate
path would best serve as a way to alter stimulus or as a way to
increase public understanding of the formulation and goals of
policy.

“There does seem to be a desire to move away from the”
mid-2013 pledge, said Dean Maki, chief U.S. economist at
Barclays Capital in New York. Policy makers who tend to favor
more stimulus believe the pledge may understate the Fed’s
commitment to easing, while officials more concerned about
inflation don’t want to promise to keep rates near zero for 18
months, he said.

Additional Accommodation

San Francisco Fed President John Williams said last month
that “further forward guidance on our future policy
intentions” could be a source of “additional monetary policy
accommodation.”

Philadelphia Fed President Charles Plosser, who dissented
against the 2013 language when it was introduced in August, said
the rate path is mainly a transparency tool rather than a means
of easing.

“I’m using this to be transparent about how policy is
being conducted,” Plosser, a member of Bernanke’s subcommittee
on communications, told reporters last week. “I’m thinking of
this as a strategy, not as a means to an outcome.”